...the problem is that there were also economists that predicted that the stimulus program would not work. So how do you distinguish 'not big enough' from 'would not work' ?

By the way, i am of the opinion that TARP and various Fed programs had a big positive impact, but the Obama stimulus program made no significant difference (except increasing the deficit). How do you evaluate such an opinion?

Good question, but how about explaining your reasoning in so concluding?

Opinions, mine anyway, can be cheap, but evidence is pricier, as WB points out. One of the things that makes economics seem more like a religion than a science is the fact that economists seem unable to agree even on most of the basic kinds of evidence. In my opinion, the direct effect of the stimulus looks fairly easy to calculate: x-dollars went out the door, y people got or kept jobs as a result. Positive feedback is only slightly harder - the people hired spent money, creating some more jobs.

The alleged negative feedbacks that I've heard of are: (a) the money borrowed by the government makes people fear future tax increases and hence save more, (b) the borrowings soak up savings that people otherwise might have spent or invested, (c) government expenditures soak up labor and production that indviduals might otherwise have paid for, and (d) fear of future inflation caused by the deficits causes people to spend less. For me, (b) and (c) only make sense if you assume that there is no shortage of final demand, and (d) makes no sense at all - fear of future inflation should make you buy almost anything rather than park your money in treasuries paying next to nothing. That leaves (a) which involves some complications about discounting the future.

Economics suffers from a more severe form of the same malady affecting climate science. Meaningful numbers require complicated and hardly transparent models with lots of moving parts. For climate we at least have the solid bedrock of physics to lean on - no such luck for economics. Even the fundamental principles of the science seem disputed by the practitioners of the various theological schools of economics. The model results that I have seen though, from both private and government sources, seem pretty much agreed that the stimulus saved something like two-million jobs. I'm not qualified to judege modelers or models, but there does seem to be a soft consensus. YMMV, but I am curious as to why you would doubt these results.

If you have other reasoning, or more persuasive versions of the above, I would be interested to hear them.

Friday, August 27, 2010

What’s in a name? Would not a turdorch* by any other name smell as sweet?

Today's question is inspired (or perhaps provoked) by this Steve Landsburg claim: "well formed statements about arithmetic are either true or false, regardless of whether they have proofs or disproofs." For example, the following: "Every even number is the sum of two primes."

Steve Landsburg has a series of posts on the foundations of arithmetic. I won’t try to summarize them in any detail, so it’s not likely that you will be able to follow my argument below without reading them at least in part. There is a central point I want to dispute, that “every well-formed arithmetical statement is either true or false,” whether provable in some axiomatic description or other.

This claim assumes that numbers, and their arithmetic, have an existence independent of that axiomatic description. As a philosophical point, I tend to agree, but the point is hardly self-evident. The strange thing to me is that Landsburg, despite his great knowledge of math, acts as if he were oblivious to the great controversies that shook the foundations of arithmetic a century ago. Frege, Russell, and others attempted to put arithmetic on a sounder foundation by reinterpreting numbers in terms of what they regarded as the more primitive notion of sets. This project collapsed precisely when Russell pointed out that there were in fact apparently well-formed statements about set theory that could neither be true nor false. (“Is the set of all sets not members of themselves a member of itself?) Gödel and others subsequently showed that there was no possible set of axioms that could prove all possible statements in arithmetic.

The fundamental question is whether existence is independent of description, and I think our author picks a poor example:

I think this claim illustrates exactly where SL goes wrong. What is Nebraska anyway? I say that it’s a geographical and political entity defined by geographical criteria and political rules. Some lines on a map and some laws constitute its very existence. It didn’t exist before those lines were drawn and those laws were adopted. It is entirely possible that those laws and lines may be mutually inconsistent, and in fact a significant business of courts is adjudicating real or apparent contradictions of just that sort. I can’t think of a meaning for the word Nebraska that isn’t defined in just some such way. We know of objects of seemingly more fundamental nature: this computer, the electron, or the blogger/economist Steve Landsburg, for example. If we look in enough detail, though, even these can start to look a bit fuzzy at the edges. Ultimately we depend on some rules of thumb or definition to distinguish one thing from another, and these rules and definitions can at least potentially contain contradictions.

Are mathematical entities like sets and numbers like Nebraska in that respect or not? I don’t think that the answer is obvious.

Thursday, August 26, 2010

If I recall correctly, Envy is reputed to be one of the seven deadly sins. Its vile reputation is well celebrated in art and literature, including this recent piece but I always like to try to comprehend the social function of common but unpopular behaviors.

Envy is a pretty fundamental element of social glue, I think. People band together in cooperative groups if they think it profits them, but when the benefits go disproportionately to one or a few, it becomes hard to trust the social bargain. That's precisely the situation in most large societies, of course, so it becomes important to suppress envy as a disreputable emotion.

You probably don't understand the great financial meltdown of 2007 if you haven't read Michael Lewis's book The Big Short. He constructs a persuasive case that that meltdown was the direct result of the most massive fraud in financial history. That fraud had more than one origin, but the engine of doom at its heart was conceived by our friends at Goldman Sachs, picked up by Deutsche Bank and then everybody else. Its elements, as outlined by Lewis, were these: vast packages of really rotten home loans were packaged, tied up with various bows, and sold as triple AAA and other highly rated bonds. In order to get these high ratings they engaged in systematic campaigns to confuse, misinform, bribe, and intimidate the ratings agencies that produced these ratings. Because there weren't enough of these truly rotten mortgages to package, they created synthetic products of side bets on the value of these bonds, and packaged and sold them with high ratings.

When the meltdown happened, legend has it that a prominent economist asked "where are the tumbrels..." referring to the carts used to deliver victims to the guillotine during the French Revolution. In a more justly vengeful world, or one in which the levers of information were less dominated by the slavish minions of Wall Street, the tumbrels would have rolled, and Wall Street executives and traders would have perished by the hundreds. In our world, their fortunes suffered a but temporary setback.

The efficient market hypothesis (EMH) is the central tenet of the Chicago economic religion. According to that dogma, the prices of products and capital computed by the market are optimal within the constraints of the information available. This optimization supposedly happens because agents could otherwise profit by taking advantage of mispriced assets. In capital markets this occurs by “shorting” the stock or bond in question, in effect betting that its price will go lower. In the real world, as opposed to the EMH model, information is often in short supply, especially where intent of fraud is in action. In such a circumstance, those who first recognize what’s happening can reap outsize rewards even as a house of cards comes tumbling down.

Michael Lewis’s book, The Big Short: Inside the Doomsday Machine, is, among other things, the story of those who figured out how to take advantage of the inevitable collapse of the giant Ponzi scheme that mortgage backed securities (MBS) had become. Since these guys make a ton of money exactly when most investors are going belly up, they look like suitable villains to a lot of people, but in fact, their function in the market is essential, preventing mispricing from becoming even more absurd. In a truly efficient market, their bets against the mispriced assets would prevent absurd mispricings from happening. In the real world, they often just signal the inevitable collapse.

I haven’t finished the book, so this isn’t yet a review, but I’m a huge fan already. Lewis is a skillful writer, the author of The Blind Side (the basis of the Sandra Bullock movie) and many other books as well as a former Wall Streeter himself, who told his story in his first book Liar’s Poker. Lewis has an intricate story to tell, that of the mortgage backed securities, sub-prime loans, and credit default swaps (CDS), but his exposition is neatly interpolated into the stories of the curious gang of green-eyeshade characters who are his primary characters: a former lawyer and comic book fan, a former accountant, and a one-eyed former neurosurgery resident for three.

These guys are among those who figured out that the MBS had become a giant Ponzi scheme and how to take advantage of that fact. What they had realized was that what were being promoted as safe investments were in fact guaranteed to fail. Once lenders and banks had figured out that they could lend money to anybody and then sell the loans to other people, thereby offloading their own risk – or so they thought – it was devil take the hindmost, and loans on the most absurd terms were shoved out the door.

Perhaps the most egregious has the arcane name interest-only negative-amortizing adjustable-rate subprime mortgage. With this marvel, the homeowner can pay nothing at all, explains Lewis, and just roll the interest owed over into the principal, making it, as Lewis notes, the perfect loan for somebody who has no income. The lender doesn’t care, since he is going to sell the mortgage to a banker who will package it up with a few thousand more into an MBS that everybody will pretend is perfectly safe.

Every Ponzi scheme needs an ultimate sucker, the guy who gets stuck with the losses. I haven’t got to that part of the book yet, but we know that the taxpayers were among them. The original losers, though, were those who bought the MBS, and those who sold the credit default swaps that insured them – dumb money.

In the Chicago fantasy, the ensuing financial disaster was due to a real shock to the economy – the massive reallocation of resources away from the building of houses that no one could afford. I find the Keynesian version more persuasive and richer in explanatory power: dumb money suddenly realized its folly, and was filled with terror of the world it no longer understood.

Sunday, August 15, 2010

One of the unhappiest marriages of modern technology is that of economists and multiple regression. With the aid of a computer, multiple regression is simple enough for anyone to do it, and far too many of them do. Another egregious example seems to be Dr Dave Berri (with details here).

His technique produces a number of counterintuitive results - for example, he rates Derek Fisher of LA as the least productive player on a winning team. This is sufficient evidence for me to rate Berri as an idiot among economist multi-regressors.

The are several kinds of pitfall for multiple regression, prominent among them neglect of correlations and of variables not in the regression. This sort of thing is especially evident in the kinds of statistics Berri uses. Key stats are what he calls "defensive efficiency" which is essentially just points scoring of the guy you are guarding and "offensive efficiency," scoring per unit time. These stats are very easily contaminated. If you are guarding Steve Nash, Deron Williams and Ray Allen, you will get a lot more points scored against you than if you are guarding some no name, but that just proves that your coach is very impressed with your defensive ability. Kobe Bryant takes a lot of hard shots, but that's mostly because when there are only hard shots to be had, he's the man to take them.

In short, Dr. Berri, there are more things under the Sun than are dreamt of in your lame-o regressions.

Various idiots on the right are flogging the idea of a list of "worst Americans." Nominees to date include the usual suspects - Obama, Jimmy Carter, FDR - as well as some less conventional choices: Lincoln, Washington, and Andrew Jackson. Paris Hilton and Michael Moore are presumably included for comic relief.

Lists, of course, are for the weak. Make one choice and stick with it, I say. So I've got to go with Chris Columbus - the sailor, not the filmaker. He not only initiated the slaughter and genocide of hundreds of millions but was a pretty nasty and avaricious fellow in his own right. Hell of a sailor, though.

Saturday, August 14, 2010

Quite suddenly, for me, popular music is again sounding really good - musically interesting and dramatic.

If you don't keep up, you might want to check out Love the Way You Lie. Besides the music, we have Megan Fox and Rihanna minus pants (and Eminem and Meriadoc Brandybuck sans shirts) in a rather dramatic video.

A vast expansion of a program paying to keep workers employed, rather than dealing with them once they lost their jobs, was the most direct step taken in the heat of the crisis.

...

The U.S. auto bailout, for instance, worked better than did most of the stimulus program. Most of the Austrians would disown this point, but you can pull it right out of Lachmann's Capital and its Structure.

Friday, August 13, 2010

The roots of the jobs crisis stretch back to the Ronald Reagan presidency when conservative economic ideology began to dominate American political discourse. At the forefront of this philosophy were three malignant notions: helping the rich get richer will inevitably help everyone else, "a rising tide lifts all boats;" markets are inherently self correcting and therefore there's no need for government regulation; and the US does not need an economic strategy because that's a natural consequence of the free market.

What followed was a thirty-year period where America's working families were abandoned in favor of the rich. Inequality rose as middle class income and wealth declined...

America has economic cancer and radical surgery is required. First, there has to be a massive redistribution of income by increasing taxes on both the wealthy and financial institutions (particularly those that were at the heart of 2008's economic meltdown).

Second, there has to be a second stimulus package that not only supports America's teachers and public safety workers but also strengthens the US infrastructure, in general. It's not logical to propose that American businesses provide better jobs without also ensuring that our schools produce workers who can meet employers' needs.

Third, the Federal government has to be involved in economic policy. The last thirty years has demonstrated that it's insane to assume the free market will do this. What we've learned is that the market follows the path of least resistance and dictates economic policy solely based on greed. Creating wealth for a handful of CEOs isn't consistent with the national interest. What are needed now are economic policies that produce decent jobs for average Americans....

Thursday, August 12, 2010

The first book I read on my new Kindle was Pride and Prejudice. I hadn't read it before but I'm happy to report that Miss Austen did a pretty good job of capturing at least the spirit of the Keira Knightley movie - except for the latter's cheesy American ending. The book got me thinking, though, about the problem of "honor" killings.

From a Darwinian point of view the honor killing seems profoundly unnatural - killing one of your own offspring just at the point of reaching her reproductive capacity seems very anti-fitness. I recall recently reading somewhere that a spate of honor killings in India was a new phenomena, related mainly to the disintegrating power of the traditional family organization. Family control of daughters is apparently a key instrument of social power.

There weren't any honor killings in P&P, to be sure, but flighty Lydia's running off with the rascally Wickham was a similar type of social earthquake. For her to be living with him, unmarried, would have brought the whole family into such disrepute that the other daughters would have no hope of marriage, and the family apparently faced social ostracism. Why so?

Some might attribute it to the absurd prejudices of a less enlightened age, but I am pretty sure that there really was some fundamental social glue involved. One element of that social glue was the need to maintain women in an inferior and disadvantaged position in society. I suspect that there is a more important element as well. Remember that most of the characters were members of a more or less purely parasitic social class, neither delving or spinning. It significantly lowered the status of the Bennets that some of their relations were "in trade" and others practiced the law.

One ingredient necessary to keep such a class in control of the nation was that their numbers could not be permitted to expand too much. Thus various regulations such as primogeniture and entail restricted inheritance, and it was necessary to thin the pool of eligible females.

Sunday, August 08, 2010

I was talking to a couple of conservative friends last night and they assured me that taxes on dividends were going up to 40% next year (from the current 15%). One retired gentlement was convinced that this was going to devastate his life style. I didn't ask how much money he was making, but he indicated that it was less than $100K - and pretty clearly a $25,000 or so income cut would be pretty painful.

Anyway, I decided to check out the rumor. It seems that Faux Biznews, Larry Krudlow, and their ilk have been pushing this meme. The reality is, that if the Bush tax scheme expires without modification, dividends would be taxed at the rate of ordinary earned income, and income over $385,000 or so would be taxed at 39.5%. Someone with an income of $100K would not see any of this rate, and the average rate would more likely be on the the order of 17-20%.

Congress is likely to do some adjustments though - either freezing in place the current rates or putting in a new dividend rate of 20% or so. In any case, as usual, the right wing noise machine is engaged in its usual dishonest demagogery.

Saturday, August 07, 2010

Record temperatures around the globe, massive draughts and fires, and huge floods have killed thousands (or tens of thousands) this summer. People are starting to ask "Is this what global warming is like?"

It's a hint, maybe. Or a tiny cell-phone preview of coming attractions. We have probably so far seen only half of the warming already baked in the cake if we stopped using fossil fuels tomorrow.

Friday, August 06, 2010

The last few week have seen the double whammy of a deteriorating economy and the associated popularities of the President and Congressional Democrats falling like a bag of dirt. Is there anything Obama can do? I can't believe that the kind of small beer talking to auto workers is going to do much for the country.

What he could do is something dramatic. Announce a national economic emergency and call on Congress to cancel recess and get back to work with a focussed agenda: create two or three million direct temporary federal jobs - a version of the Depression's CCC. These jobs would be in labor intensive, direct short term jobs - teacher's aides, elder care, infrastructure maintenance - As Robert J. Schiller advocated in this NYT Op-Ed entitled "What Would Roosevelt Do?".

Republican's would doubtless resist, but at least that would give Democrats a club to beat them with, and a program should they salvage the election.

Thursday, August 05, 2010

Obama seems poised to lead the Democratic party to a historic bloodbath, and it's hard to say that they don't deserve it. Unfortunately, Republicans are so much worse that it's hard to avoid despair. Obama's decision to seek the Presidency was a bold one, but having won it his boldness seem to desert him. Instead we have seen a pattern of deferring to elites and avoiding taking on the Republicans squarely. Without strong leadership, the Democratic Congress seems afraid of its own shadow - witness, for example, their cowardly failure to support health care for the 9/11 responders.

There was a time, I think, when a bold plan for jobs might have turned the tide: say two million direct hires for a CCC type program. Now, I think, it's much too late. The President is going around the country cheering tiny victories while the jobs economy is in collapse.

Tuesday, August 03, 2010

"The universe has eleven dimensions, but we don't see seven of them. It's like having basic cable." That is an approximation of the most memorable quote from String Theory, the movie. Yes, there really is a movie by that name, starring people you never heard of, and there is even quite a bit of chatter about string theory. Getting the drift of this movie is a bit like learning string theory - time consuming and arduous. After the initial scene where the preacher croaks in the middle of giving a sermon to a nearly empty church, it takes quite some time to introduce the other main characters - a mute boy, a homeless man, a prostitute whom we are sure will turn out to have a heart of gold, a string fanboy/druggie/??, an aging physics prof, a mercenary coke snorting televangelist, a couple of hoodlums... you get the idea.

OK, I picked up this movie for the title. Aside from the morality play/action drama playing out in the background, an awful lot of this movie is about drugs - though there is a bit of not quite explicit sex.

Monday, August 02, 2010

Grover Norquist and his Americans For Tax Reform basically have only one principle: low taxes for the rich. One of the myths they spread is that the US is a high tax country. It isn't. True, there are lower tax countries. Pakistan for example. Sierra Leone.

It's not coincidence that these countries are a mess. Their governments lack the resources to organize a modern country - though of course their corruption is a factor as well. Among OECD countries. in typical years only Mexico has a lower tax burden than the US - not coincidentally another country that is having great trouble holding itself together.

These low tax paradises may be hell for the average citizen, but the rich can live high on the hog. Servants work cheap.

Let's say no to the Republicans who want to turn us into Pakistan or Mexico.

Lubos Motl has a new post up on Black Holes and White. I think that he gets a bit carried away with his theme that white holes are not time reversed black holes, but he makes some illuminating points. From the standpoint of pure general relativity, I think, it really is true that white holes are time reversed black holes - at least from the standpoint of a distant observer. There is one very important experimental fact about white holes: they don't seem to exist.

There is one sort of exception, however: the Big Bang. I asked him about this, and if I correctly understand his answer, it's this: entropy. Black holes have a very large entropy, but the big bang had extremely low entropy. I like this answer a lot, mostly because it takes us back to microphysics. What follows are my own thoughts, inspired by Lumo's comment but hardly his fault.

If we look at a black hole in terms of its interior, or maybe just its surface, as a seething mass of strings (or what have you), only an incredibly unlikely coincidence could correlate the momenta so precisely as to detonate the black hole as a white hole. (Like the shattered watch spontaneously reassembling itself times ten to the zillionth). The white hole at the beginning of time had to be different.

Perhaps that cosmic egg was in some state of very high symmetry such that it could only decay in some very precisely correlated way, such that the momenta really did conspire.

There is a widespread and well justified fear of deflation among economists. Paul Krugman rarely misses an opportunity to warn about it. The basic argument is that deflation destroys jobs and creates economic paralysis, since it makes it more valuable to sit on money than spend or invest it. There is plenty of history to back this view.

Not everybody shares this view though. Michael Pento, allegedly an economist for some investment fund, is one who doesn't. He makes his argument here. - shame on Huffington for this.

Deflation is an ill wind, but it blows good to some. Borrowers may be crushed, but lenders do very well indeed - if they can get their money back. History has more than a few fortunes built on the power of deflation to extract money from the public and concentrate it in the hands of bankers. The rentier class is the big benificiary of deflation. Entrepreneurs and workers grow poorer, but the rich grow richer.

Unfortunately we live in a time when that class has captured much of the government, including a lot of the Federal Reserve

ACROSS the United States, thousands of federally financed stimulus projects are under way, aimed at bolstering the economy and putting people to work. The results so far have not been spectacular.

Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less — but we need to focus much more on actually putting people to work.

Two friends of mine, both economists, came upon a stimulus project recently that illustrated the problem. On a Wyoming highway they saw a sign that read “Putting America to Work: Project Funded by the American Recovery and Reinvestment Act” and prominently featured a picture of a worker digging with a shovel. Out on the road, there was plenty of equipment, including a gigantic asphalt paver, dump trucks, rollers and service vehicles. But there wasn’t a single laborer with a shovel. That project employed capital, certainly, but not many human beings.

...

Yet unless we take new measures, we face the prospect of protracted unemployment. In June, the unemployment rate stood at 9.5 percent and the rate of long-term unemployment, defined as joblessness for at least 27 weeks, was 4.4 percent — its highest level since 1948. Both Ben Bernanke, chairman of the Federal Reserve, and Christina Romer, chairwoman of the White House Council of Economic Advisers, recently said that high unemployment was likely to persist for years.

This would have an enormous human cost, and it is especially worrisome for people who are young or otherwise vulnerable and may be inclined to give up and drop out entirely. Ultimately, of course, this will show up in the traditional measures of G.D.P., as well.

So here’s a proposal: Why not use government policy to directly create jobs — labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research? ...

In a period of severe joblessness like this one, however, someone who is sitting unemployed who would rather be working at a modest salary as a teacher’s aide should be given a chance, at least until the economy improves. In other words, the unemployment rate itself should be a major factor in evaluating such programs.

In 1936, John Maynard Keynes made much the same point: “Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the ‘financial’ burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment.”

PRESIDENT FRANKLIN D. ROOSEVELT’S New Deal, though no more than partly successful, was much more focused on job creation than our current economic stimulus has been. It seems that the New Deal was also more successful at inspiring the American public.

Consider one of the most applauded of Roosevelt’s programs, the Civilian Conservation Corps, from 1933 to 1942. The program was open to young men, initially those 18 to 25, a group that was quite vulnerable economically. The C.C.C. emphasized labor-intensive projects like planting trees.

...

Big new programs to create jobs need not be expensive. Suppose the cost of hiring a single employee were as high as $30,000 a year, several times typical AmeriCorps living allowances. Hiring a million people would cost $30 billion a year. That’s only 4 percent of the entire federal stimulus program, and 0.2 percent of the national debt.

Why don’t we just do it?

The entire article is worth reading - I strongly recommend it. I would add one thing. The jobs should be low wage, but they should include health insurance - one of the biggest worries for the uemployed.

Christiane Amanpour has been a great reporter, but I didn't care for her as moderator of ABC's This Week. She did ask a few good questions when she was on the subject of Afghanistan, but when it turned to the economy, and there was actually something interesting coming out between Will and Krugman, she turned instead to her Madrid based expert on the Taliban. WTF? On politics she was just boooorrring.

The interview with Defense Secretary Gates was mainly scary for his enunciation of a excruiatingly bankrupt American strategy: "reverse Taliban momentum" (whatever that might mean), degrade their capability, improve security, persuade them to agree to Karzai's terms. But we won't "nation build."

OK, we are in Afghanistan, never mind that the al Quaeda guys we went there to fight are now across the border in Pakistan having tea. Of course our being there annoys some Afghans (the Taliban) who kill our soldiers, so we kill some more Afghans, which still others find annoying, but we won't do anything that Afghans might find useful, since that could be interpreted as "nation building." And, oh yeah, we will start leaving next year, but hey Taliban, don't get encouraged by that cause we are going to leave real slooowwwly.

It's really hard to win a war when you have no clue as to what the hell you trying to do. It looks like we are trying to negotiate a settlement with the Taliban. If that's our objective, then let's start negotiating. It's probably impossible to win a war if you leave them a safe haven across a long unpatrollable border. If we didn't learn that in Vietnam, we probably are too stupid to live.